The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

This list of cheap ETFs covers the ones holding long-term bonds. You’d buy one of these things if you want to make a quick bet that interest rates will go down. Cheapness, here, is measured over the hot-potato holding period of three months.

A popular vehicle for the interest-rate crapshoot is the iShares 20+ Year Treasury Bond ETF (TLT). The maturities of its bonds are distant enough to give the portfolio a duration of 16.7 years, Morningstar informs us. That means a one-point move in interest rates makes the price of this fund jump up or down by about 17%.

You would have lost 13% of your money owning TLT in 2013, as interest rates went up. You would have made 13% owning it in the first half of 2014, when rates receded. As noted, owning government debt is like playing craps.

Per $10,000 invested, the cost of making a TLT bet (round-trip over three months) is $5 or so, not including the brokerage commission. That is considerably lower than the house take at a casino.

Another place to make a short-swing bet would be at the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). This large fund sees a lot of trading volume and as a result has a very tight bid/ask spread, keeping your transaction cost down. The drawback is that there is less price action here, with a duration of only 7.7 years.

The iShares 7-10 Year Treasury Bond fund (IEF) has a volatility similar to LQD’s, with a duration of 7.6 years. Its credit quality is higher and its yield lower than LQD’s.

Another bond fund that moves around a lot is the Vanguard Long-Term Bond Index fund (BLV), with a duration of 14.2 years. Alas, it is a suboptimal trading vehicle. Its sleeping trading volume accords it a fairly high transaction cost.

One of the most exciting bond funds in a time of rate volatility is the Vanguard Extended Duration Treasury Index ETF (EDV), with a duration of 25 years. This tiny, low-volume fund, however, is a terrible play for in-and-outers. With a three-month ownership cost of $24, it doesn’t even qualify to appear on the Best ETFs for Traders list.

Some people, of course, use bond ETFs not to gamble but to invest for retirement. If your investment horizon is long, skip this three-month scorecard and go to Best ETFs for Investors, which assesses fund costs over ten years. The long-bond table for investors is here.

The rules and methods for the Best ETFs for Traders rankings are set forth in this summary. That file also has links to all the tables.

The cost figure measures how much you lose to fund fees and the bid/ask spread if you invest $10,000 for three months. Tradability is a statistic from ETF.com that captures how easy it is to get in and out of a position.

The "commission-free" column reflects deals available at Fidelity, Schwab, TD Ameritrade and Vanguard. Note: Some commission freebies are round-trip; others apply only to a purchase.